Business optimism among small and medium-sized firms is at its highest since the beginning of 2001, according to ISME, the organisation representing the sector.

The organisation's Spring 2004 business trends survey has found that 30 per cent of small companies believe they will increase employment in the coming year.

More than one-third (35 per cent) of the 431 respondents to the 2,000 questionnaires sent out said they felt more optimistic about business prospects than they had 12 months ago.

The corresponding figure for last year was 13 per cent. The organisation said the 30 per cent of businesses that felt they would be increasing employment this year compared well with results during the Celtic Tiger period.

The survey found that 25 per cent of exporters had seen the value of their exports increase during the past 12 months, while 22 per cent had experienced a drop in value.

The survey showed respondents were concerned about increasing costs, with rises of 10 per cent being recorded in rents, wages, raw materials and insurance. There was evidence of a slowdown in increases in rent and insurance.

"Increasing labour costs are now being seen as the most significant threat to SMEs in the immediate future and have the potential to hinder job creation and business expansion," the organisation said.

ISME said its members overwhelmingly supported the privatisation of State companies and that only 38 per cent of respondents felt social partnership had been beneficial to their business.

It said that, given that Ireland had little influence on international business factors, labour costs must be prevented from undermining progress.